The first loan we made at Community Sourced Capital was for $2,950. It involved 31 Squareholders lending on average $100 each. The loan itself was to an entrepreneur in our existing network who was willing to try out our new community finance system. We kept the amount low to keep things easy, and the loan was repaid pretty quickly.
We’ve made a lot of progress since then. We’re a bigger company with more capacity for handling larger loans. This month, we’re making our largest loan to date: $47,000.
We saw a constraint in our system pretty early on. Entrepreneurs were limited by how much they could raise based on the size of their community. In some cases, it was based on the wealth in their community, too. In order to create larger loans, we needed a partner who could help provide larger sums of capital for businesses. More importantly, we needed a partner who believed in the power of communities to select businesses they believed in. We invited our friends at Craft3, a Community Development Finance Institution (CDFI) in the Pacific Northwest, to prototype this co-lending partnership with us, and they said yes.
The core metric in our lending system is social capital. The ability for a business owner to demonstrate that their community loves and trusts them creates a kind of credibility that’s hard to document in traditional bank underwriting, but is very present in the end repayment rate of a business loan. The simple hypothesis is this: are borrowers more likely to succeed when they are surrounded by a supportive community? Framed for a banker: are borrowers more likely to repay loans when they know the people that provided the capital?
So we set out with a simple framework — capital provided by community members can be matched with capital from a financial partner. A simple example is a loan to Seattle company Plum Restaurants and their new location the Sugar Plum, a vegan sweets store. $23,500 provided by 166 Squareholders is matched with $23,500 from Craft3. Each of the individuals providing capital in the first $23,500 are casting a vote for an entrepreneur and a business they love and want to support. That’s a kind of voice for social capital that deserves to be amplified by additional financial capital.
We are also testing out this loan structure with two other businesses in Seattle right now, one for a $6,250 loan matched to $12,500, and one for a $17,200 loan matched to $35,400.
As I’m sitting here explaining this partnership on my computer, I’m trying to ask myself “what is it that I’m really trying to convey? What do I really want to say about this new source of capital?” What I’d really like to say is that, financial systems require ongoing maintenance. Systems gain resiliency when people challenge how they work and question what their purpose is. If you share my thinking, then you’ll agree that one core purpose of a resilient financial system is to move capital to small businesses that have a plan to use it in a responsible and sustainable way. If we can use a community’s voice to power that purpose, then I think we have a really good start on creating a holistic financial system that everyone can participate in.
Read more about our partnership with Craft3 at communitysourcedcapital.com/craft3